Bridging loan is a type of short-term loan. Essentially, it is a temporary loan which individuals use to get from A to B, until you can secure a permanent finance solution or you can clear the full loan. Hence, the ‘bridge’ idea, this type of finance can get you from one step to another. Bridging loans are a widely used finance solution among businesses. There are a lot of benefits of these loans compared to traditional types of loans.
The reason behind the popularity of bridge finance is that whenever a quick finance solution is needed for a short period, these loans can be the cheapest way to raise funds. Additionally, these loans can be arranged quickly and have flexible lending criteria to give quick approvals without extensive checking. Bridging loans usually are secured against different types of UK properties such as properties that are unsuitable for other lenders.
Uses of Bridging Loans
Bridging loans can be used for several different reasons which we are going to list below:
Refurbishment Loan – Converting, renovating or restoring a property
Often properties are considered unsuitable for a mortgage because of property’s poor condition, or if it’s a residential property, it may be that the property lacks a bathroom or kitchen. Bridging loan or refurbishment loan can be secured against the properties that other lenders might consider unsuitable. This type of financing is beneficial for property landlord and developers who want to purchase a property to renovate and then sell, or refinance with a buy-to-let mortgage.
Maintain a place in a sale chain
If you are purchasing a property by selling other properties, but for some reason the sale doesn’t get completed at the time of purchase, this is where bridging finance can be used to bridge the gap and help you wait while the purchase gets completed. You can use the short term bridge loan till the sale gets finalized, and then use the proceeds of the sale to repay the loan. This is a conventional method of using bridging loans.
Solve short term cash flow issue for business
Once in a while, every business runs into cash flow problems. For instance, a bank might call in an overdraft facility, customers may be late for paying their invoices, new equipment may be needed or other seasonal factors may arise. In these situations, bridging loans can provide quick relief to businesses.
You can use new bridging loans to replace an existing loan which is approaching the end of its term or has gone over it. You can arrange facilities to replace existing facilities with a cheap alternative, to extend the term of loan or to release more funds. If a bridge loan goes over its decided term then it usually means something has gone wrong and can also prove to be very costly.
Purchasing property below market value
Majority of bridging loan providers lend against a property’s open market value and not the buying price. This is helpful when purchasing property that sells for a price below its market value.
Purchasing a property at auction
If you win a bid at an auction, you will have to pay a deposit of 10% on the same day, and the rest is paid within 28 days. This time period can be short! So you have to see the auction guide. However, bridging finance can be used to purchase properties at auction since these loans can be set up quickly, ensuring that the purchase can be completed within the time period.
Often it can be hard to obtain funds for quick property purchases, since capital is usually tied up to a property or other asset. In such a situation, you can arrange a bridging loan quickly, which is secured against the equity in a property. Then you can sell the purchase for a quick profit and can repay the loan.
If a property is to be repossessed then with the help of bridging finance, the debt can be paid off, and repossession can be prevented. This allows the owner to get control of the property so they can avoid a forced sale and sell it on their terms.
Inheritance tax and probate problems
Sometimes finance is needed when dealing with inheritance tax and probate problems. There are a lot of reasons such as having to release charges on properties, tax payment or other bills or to pay off other beneficiaries that could need immediate funds.
You can also use bridging finance to raise funds needed to finance properties development.
Drawbacks of Bridging loans
The most important thing that you must remember is that bridge loans are only intended for short term finance. The monthly interest rate can be high compared to other types of finance, so it should not be used for a long-term need. You should always have an exit plan because at the end of the term you will need to repay the loan.